RBI/2022-23/131

DOR.MRG.REC.76/00-00-007/2022-23 October 11, 2022

Dear Sir / Madam,

Reserve Bank of India (Unhedged Foreign Currency Exposure) Directions, 2022

The Reserve Bank of India has, from time to time, issued several guidelines /
instructions / directives to the banks on Unhedged Foreign Currency Exposure (UFCE)
of the entities which have borrowed from banks.

2. We have received references from banks seeking clarification on various aspects

including inter-alia clarity in the definition of ‘entities’ for which banks shall assess
UFCE, exempted exposures / entities, alternative method for smaller entities,
assessment of UFCE of entities incorporated outside India by overseas subsidiaries /
branches of Indian banks etc.

3. Accordingly, a comprehensive review of the extant guidelines has been undertaken

and all the existing instructions on the subject including the revisions / clarifications on
the issues stated above have been consolidated in the Directions enclosed herewith.
An Explanatory Note providing the background for these Directions is also enclosed.

Applicability

4. This circular is applicable to all commercial banks (excluding Payments Banks and
Regional Rural Banks).

5. These instructions shall come into force from January 1, 2023.

Yours faithfully,

(Usha Janakiraman)
Chief General Manager

_____________________________________________________________________________--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- --------------------------------_______

िविनयमन िवभाग, क�द्रीय काया�लय, 12वीं और 13वीं मंिज़ल, क�द्रीय काया� लय भवन, शहीद भगत िसंह माग�, मुंबई 400001
टे लीफोन /Tel No: 22661602, 22601000 फै�/Fax No: 022-2270 5670, 2260 5671, 5691 2270, 2260 5692
Department of Regulation, Central Office, 12th & 13th Floor, Central Office Bhavan, Shahid Bhagat Singh Marg, Mumbai - 400001
Tel No: 22661602, 22601000 Fax No: 022-2270 5670, 2260 5671, 5691, 5692
 DEPARTMENT OF REGULATION
Notification No.DOR.MRG.77/00-00-007/2022-23 dated October 11, 2022

Reserve Bank of India (Unhedged Foreign Currency Exposure) Directions, 2022

In exercise of the powers conferred under Section 35 A of the Banking Regulation Act,
1949 (hereinafter called the Act), the Reserve Bank of India (hereinafter called the
Reserve Bank), being satisfied that it is necessary and expedient in the public interest
to do so, hereby, issues the Directions hereinafter specified.

CHAPTER I - PRELIMINARY
1. Short title and commencement
a) These Directions shall be called the Reserve Bank of India (Unhedged Foreign
Currency Exposure) Directions, 2022.

b) These Directions shall come into effect from January 1, 2023.

2. Applicability
The provisions of these Directions shall be applicable to all commercial banks
excluding Payments Banks and Regional Rural Banks (hereinafter collectively referred
as “banks”). These Directions shall be applicable to overseas branches / subsidiaries
of banks incorporated in India as specified in clause 10 hereinafter.

3. Definitions
(a) In these Directions, unless the context states otherwise, the terms herein shall bear
the meaning assigned to them below:

i. “Earnings before Interest and Depreciation (EBID)" shall have the same
meaning as defined for computation of Debt Service Coverage Ratio (DSCR)
i.e., EBID = Profit After Tax + Depreciation + Interest on debt + Lease Rentals,
if any.
ii. “Entity” means a counterparty to which bank has exposure in any currency.
Explanation: Exposure shall mean all fund-based and non-fund-based
exposures.
 Reserve Bank of India (Unhedged Foreign Currency Exposure) Directions, 2022

iii. “Financial hedge” shall mean hedging through a derivative contract with a
financial institution. Financial hedge shall be considered only where the entity
has documented the purpose and the strategy for hedging at inception of the
derivative contract and assessed its effectiveness as a hedging instrument at
periodic intervals.
Note: For the purpose of assessing the effectiveness of hedge, guidance
may be taken from the applicable accounting standards and the relevant
guidance notes of the Institute of Chartered Accountants of India on the
matter.
iv. “Foreign Currency Exposure (FCE)” of an entity shall mean the gross sum of
all items on the entity’s balance sheet that have impact on its profit and loss
account due to movement in foreign exchange rates.
v. “Listed entities” shall mean entities listed on the recognized stock exchanges.
vi. “Natural hedge” shall mean a hedge arising out of the operations of the
company when cash flows offset the risk arising out of the Foreign Currency
exposure (FCE).
Note: An exposure shall be considered as naturally hedged only if the
offsetting exposure has the maturity / cash flow within the same
accounting year. 1
vii. “Unhedged Foreign Currency Exposure (UFCE)” shall mean Foreign Currency
Exposure (FCE) excluding items which are effective hedge of each other. While
estimating UFCE of an entity, banks shall consider only two types of hedges -
financial hedge and natural hedge.

(b) All other expressions unless defined herein shall have the same meaning as have
been assigned to them under the Banking Regulation Act, 1949 or the Reserve Bank
of India Act, 1934 and rules/regulations made thereunder, or any statutory modification
or re-enactment thereto or as used in commercial parlance, as the case may be.

1
For instance, export revenues (booked as receivable) may offset the exchange risk arising out of repayment
obligations of an external commercial borrowing if both the exposures have cash flows / maturity within the
same accounting year.

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 Reserve Bank of India (Unhedged Foreign Currency Exposure) Directions, 2022

CHAPTER II – GENERAL GUIDELINES

4. Computation of UFCE
(a) Banks shall ascertain the Foreign Currency Exposure (FCE) of all entities 2 at least
on an annual basis. Banks shall compute the FCE following the relevant accounting
standard applicable for the entity.

Explanation: Banks shall consider the items maturing or having cash flows over
the period of next five years.

Note: For arriving at the foreign currency exposure of entities, their exposure
from all sources including foreign currency borrowings and External Commercial
Borrowings shall be taken into account.

(b) Banks shall assess the Unhedged Foreign Currency Exposure (UFCE) of entities
with FCE by obtaining information on UFCE from the concerned entity.

Provided that the information on UFCE shall be obtained from entities on a

quarterly basis based on statutory audit, internal audit or self-declaration by the
concerned entity.

Provided further that UFCE information shall be audited and certified by the
statutory auditors of the entity, at least on an annual basis.

5. Provisioning and Capital Requirements

(a) Banks shall determine the potential loss to an entity from UFCE using the largest
annual volatility in the USD-INR exchange rates during the last ten years. 3

Note: The Unhedged Foreign Currency Exposure (UFCE) in currencies other

than USD shall be converted into USD using the current market rates for
determining the potential loss from UFCE.

(b) Banks shall determine the susceptibility of the entity to adverse exchange rate
movements by computing the ratio of the potential loss to entity from UFCE and the

2
The requirement in clause 4(a) would not be applicable for entities which are already submitting the
information on UFCE as per clause 4(b).
3
Banks shall use the data published by FEDAI on largest annual volatility of USD-INR rate over a period of last
10 years and the same shall be used for computation of potential loss by multiplying it with UFCE.

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 Reserve Bank of India (Unhedged Foreign Currency Exposure) Directions, 2022

entity’s EBID over the last four quarters as per the latest quarterly results certified by
the statutory auditors 4.

Note: (1) In cases where banks are not in position to obtain information on UFCE
or EBID from listed entities for the latest quarter due to restrictions on
disclosure of such information prior to finalisation of accounts, banks shall
have the option to use data pertaining to the immediately preceding last
four quarters for computing capital and provisioning requirements.

(2) In case of unlisted entities where the audited results of the last quarter
are not available, the latest audited quarterly or annual results available
shall be used. The annual EBID figure used shall at least be of the last
financial year.

(c) Accordingly, banks shall apply incremental capital and provisioning requirements 5
to all exposures to such entities as under:

Incremental
Incremental Capital
Potential Loss / EBID (%) Provisioning
Requirement
Requirement
Upto 15 per cent 0 0

More than 15 per cent and

20bps 0
upto 30 per cent

More than 30 per cent and

40bps 0
upto 50 per cent

More than 50 percent and upto

60bps 0
75 per cent

25 per centage point 6

More than 75 per cent 80 bps
increase in the risk weight

4
For the purpose of this sub-clause, the directions do not differentiate between limited audited results and full
audited results.
5
Incremental capital and provisioning requirements shall be over and above the present requirements i.e.,
general provision for standard assets and applicable credit risk weights as per Master Circular - Prudential norms
on Income Recognition, Asset Classification and Provisioning pertaining to Advances dated April 1, 2022 and
Master Circular – Basel III Capital Regulations dated April 1, 2022 respectively.
6
For example: for an entity which otherwise attracts a risk weight of 50 per cent, the applicable risk weight
would become 75 per cent.

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 Reserve Bank of India (Unhedged Foreign Currency Exposure) Directions, 2022

Note: The incremental provisioning for UFCE shall be based on the total
exposure amount which is used for computing standard asset provisioning and
incremental capital requirements for UFCE shall be based on the total exposure
amount which is used for computing credit risk capital requirements.

(d) Banks shall calculate the incremental provisioning and capital requirements at a
minimum on a quarterly basis.

(e) For projects under implementation and the new entities, banks shall calculate the
incremental provisioning and capital requirements based on projected average annual
EBID for the three years from the date of commencement of commercial operations.

Provided that the incremental capital and provisioning requirement shall be

subjected to a minimum floor of 20 bps of provisioning requirement.

(f) In cases where the bank is not able to get sufficient data to assess UFCE and
compute incremental capital and provisioning requirements except for the smaller
entities covered under the alternative method provided in sub-clause (g) below, the
bank shall take a conservative view and place the exposure to the entity at the last
bucket which requires incremental provisioning of 80bps and a 25 per centage point
increase in risk weight.

(g) Banks shall have the option to follow an alternative method for exposures to smaller
entities which are having foreign currency exposures and are not in position to provide
information on their UFCE as per clause 4(b). Under this alternative method, banks
shall apply an incremental provisioning of 10 bps over and above extant standard
asset provisioning instead of computing incremental capital and provisioning
requirements as provided in clause 5(a) to 5(e).

Explanation: For this purpose, smaller entities are those entities on which total
exposure of the banking system is at Rs.50 crore or less.

6. Systems and Controls

(a) Banks shall incorporate the risk of UFCE of entities in their internal credit rating
system and credit risk management policies and procedures.

(b) Banks shall stipulate internal limits for UFCE within the overall Board approved risk
policy of the bank.

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 Reserve Bank of India (Unhedged Foreign Currency Exposure) Directions, 2022

7. Consortium Lending
(a) In the case of consortium / multiple banking arrangements, the consortium leader
/ bank having the largest exposure shall have the lead role in monitoring the unhedged
foreign exchange exposure of entities.

Note: Banks shall put in place a system for information sharing and dissemination
in terms of circular DBOD.No.BP.BC.94/08.12.001/2008-2009 dated December
8, 2008 on 'Lending under Consortium Arrangement / Multiple Banking
Arrangements', as amended from time to time

8. Exemption / Relaxation
(a) Banks shall have the option to exclude the following exposures from the calculation
of UFCE:

(i) Exposures to entities classified as sovereign 7, banks 8 and individuals.

(ii) Exposures classified as Non-Performing Assets.

(iii) Intra-group foreign currency exposures of Multinational Corporations (MNCs)

incorporated outside India 9.

Provided that the bank is satisfied that such foreign currency exposures
are appropriately hedged or managed robustly by the parent.

(iv) Exposures arising from derivative transactions and / or factoring transactions

with entities, provided such entities have no other exposures to banks in India.

9. Capital Treatment and Disclosures

The incremental provision requirement for UFCE shall be treated as general provision
for disclosures and inclusion in Tier 2 capital.

10. Overseas Branches/Subsidiaries

(a) The provisions of these Directions shall be applicable to overseas
branches/subsidiaries of banks subject to the following:

7
For this purpose, sovereign shall include domestic and foreign sovereign as provided in paragraph 5.2 and 5.3
of Master Circular on Basel III Capital Regulations dated April 1, 2022, as amended from time to time.
8
For this purpose, RBI regulated financial institutions (SIDBI, NABARD, NHB, EXIM Bank and NaBFID), Bank of
International Settlement (BIS), International Monetary Fund (IMF) and eligible Multilateral Development Banks
(MDBs) listed in paragraph 5.5 of Master Circular on Basel III Capital Regulations dated April 1, 2022 shall be
considered as ‘bank’.
9
For example, an Indian subsidiary of an MNC incorporated outside India may have borrowed from its parent.

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 Reserve Bank of India (Unhedged Foreign Currency Exposure) Directions, 2022

(i) With respect to the exposure to entities incorporated outside India, information
on UFCE shall be obtained from such entities on a quarterly basis based on
internal audit or self-declaration and the requirement of certificate from statutory
auditors on annual basis, as provided in clause 4(b), may not be insisted upon.
In cases where bank is not able to obtain information on UFCE from concerned
entities, the treatment provided in clause 5(f) shall apply.

(ii) Banks shall compute the potential loss due to UFCE by replacing INR with
the domestic currency of that jurisdiction and USD with the foreign currency (i.e.,
currency other than domestic currency of that jurisdiction) in which the entity has
maximum exposure in clause 5(a).

Note: Banks shall compute the largest annual volatility over a period of last
ten years in the following manner: First, daily changes in the foreign
exchange rates shall be computed as a log return of today's rate over the
previous day's rate. Second, daily volatility shall be computed as standard
deviation of these returns over a period of one year (250 observations).
Third, this daily volatility shall be annualised by multiplying it by square root
of 250. This computation shall be performed on a daily basis for the all the
days in the last ten years. The largest annual volatility thus computed shall
be used for the computation of the potential loss by multiplying it with the
UFCE.

Chapter III – REPEAL PROVISIONS

11.1 With the issue of these Directions, the instructions / guidelines contained in the
following circulars issued by the Reserve Bank stand repealed.

Circular No. Date Subject

1 DBOD.BP.BC.37/21.04.048/2001- October Monetary and Credit Policy
2002 27, 2001 Measures - Mid-Term Review for
the Year 2001-2002 - Unhedged
Foreign Currency Exposures of
Corporates
2 DBOD.BP.BC.51/21.04.103/2003- December Mid-term Review of Monetary and
2004 5, 2003 Credit Policy for the year 2003-04 -
Unhedged Foreign Currency
Exposures of Corporates

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 Reserve Bank of India (Unhedged Foreign Currency Exposure) Directions, 2022

3 DBOD.BP.BC.96/21.04.103/2008- December Unhedged Foreign Exchange

09 10, 2008 Exposure of Clients - Monitoring by
Banks
4 DBOD.BP.BC.No.76/21.04.103/20 February Second Quarter Review of
11-12 2, 2012 Monetary Policy 2011-12 –
Unhedged Foreign Currency
Exposure of Corporates
5 DBOD.BP.BC.No.61/21.04.103/20 November Second Quarter Review of
12-13 21, 2012 Monetary Policy 2012-13 –
Unhedged Foreign Currency
Exposure of Corporates
6 DBOD.No.BP.BC.85/21.06.200/20 January Capital and Provisioning
13-14 15, 2014 Requirements for Exposures to
entities with Unhedged Foreign
Currency Exposure
7 DBOD.No.BP.BC.116/21.06.200/2 June 3, Capital and Provisioning
013-14 2014 Requirements for Exposures to
entities with Unhedged Foreign
Currency Exposure-Clarifications
8 Mailbox Clarification July 8, Capital and Provisioning
2016 Requirements for Exposures to
Entities with Unhedged Foreign
Currency Exposure
9 DOR.No.MRG.BC.41/21.06.200/20 February Capital and provisioning
20-21 17, 2021 requirements for exposures to
entities with Unhedged Foreign
Currency Exposure

11.2 All approvals / acknowledgements given under the above circulars shall be
deemed as given under these Directions.

11.3 All the repealed circulars are deemed to have been in force prior to the coming
into effect of these Directions.

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 Explanatory Note to Reserve Bank of India
(Unhedged Foreign Currency Exposure) Directions, 2022

Explanatory Note 1 to Reserve Bank of India (Unhedged Foreign Currency

Exposure) Directions, 2022

October 11, 2022

Introduction

1. Unhedged foreign currency exposures of any entity are an area of concern not
only for the individual entity but also to the entire financial system. Entities which do
not hedge their foreign currency exposures can incur significant losses during the
period of heightened volatility in foreign exchange rates. These losses may reduce
their capacity to service the loans taken from the banking system and increase their
probability of default thereby affecting the health of the banking system.

Background and Rationale

2. The Reserve Bank of India first introduced the concept in October 1999 as part
of risk management systems after it was observed during the economic crises in some
countries that banks bear additional credit risk on entities which have unhedged
foreign currency risk. Accordingly, banks were advised to evolve a suitable framework
for regular monitoring of foreign currency risk exposure of entities which do not have
natural hedge and to factor such unhedged exposures of entities into the risk rating
system for taking credit decisions.

3. The aim of the framework was that the banks should price the risk from
Unhedged Foreign Currency Exposure (UFCE) as credit risk premium which may
nudge entities to hedge their foreign currency exposures in the market. To this end,
banks were further advised though a series of instructions to a) regularly monitor the
unhedged portion of large foreign currency exposures of entities; b) have a Board
approved policy on hedging of foreign currency loans; and c) have a mechanism for
information sharing on UFCE in case of consortium lending. However, a sizeable
portion of entities’ foreign currency exposures remained unhedged resulting in
significant but avoidable risks to entities’ balance sheets, in turn, impacting the quality
of bank’s assets.

1
Explanatory Note is a non-technical description of the rationale / background for introducing the Reserve Bank
of India (Unhedged Foreign Currency Exposure) Directions, 2022. The sole purpose of this note is to facilitate
better understanding of the Directions by market participants. In case of any conflict between the explanatory
note and the Directions, the Directions shall prevail.

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 Explanatory Note to Reserve Bank of India
(Unhedged Foreign Currency Exposure) Directions, 2022

4. To address the risk on bank’s books, banks were advised to maintain

incremental provisioning and capital requirements for their exposures to entities with
UFCE. The process of computing incremental provisioning and capital requirements
can be summarised in following steps:

a) Step 1: Assess the foreign currency exposure (FCE) of the entity.

b) Step 2: Ascertain the amount of UFCE from entities’ FCE taking into account
two types of hedges – natural hedge and financial hedge.
c) Step 3: Estimate the potential loss to the entity from UFCE exposure of entity
due to exchange rate movements.
d) Step 4: Maintain incremental provisioning and capital requirements against
banks’ exposure to the entity based on impact of likely / potential loss on entity’s
overall profitability.

5. Based on banks’ feedback, a few amendments were made to the guidelines for
operational clarity and accuracy of information obtained. These included, inter alia,
allowing collection of information on UFCE directly from entities (through self-certified
/ audited UFCE certificates); clarification on capital treatment of incremental
provisioning requirement for UFCE; and treatment in case bank is unable to obtain
information on UFCE from entity. Banks were also given an option to follow an
alternative method for their exposure to smaller entities. Under this alternative method,
instead of obtaining information on UFCE from smaller entities, bank could maintain
incremental provisioning of 10 bps for such exposures.

6. Further, some exposures were excluded from the ambit of these instructions,
namely, inter-bank exposures, intra-group exposures of Multinational Corporations
incorporated outside India and exposure to entities which have not borrowed from
Indian banking system.

Key Changes in the Directions

7. In addition to consolidating all the instructions on the subject at one place, the
key changes that have been incorporated in the Directions are as follows:

7.1 Definition of Entity: At present, banks are required to assess UFCE of all
entities. The term ‘entities’ is defined as those entities which have borrowed from
banks including borrowing in INR and other currencies irrespective of the size of

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 Explanatory Note to Reserve Bank of India
(Unhedged Foreign Currency Exposure) Directions, 2022

exposure / entity. On a review, the revised definition of entity states that “Entity” means
a counterparty to which bank has exposure in any currency.

7.2 Exemption from UFCE guidelines: At present, banks' exposures to an entity

arising from derivative transactions only is excluded from the purview of UFCE
guidelines. This exemption has been expanded to include factoring transactions.
Accordingly, banks’ exposures to an entity arising from derivative transactions and/or
factoring transactions only shall be excluded from the purview of UFCE guidelines. In
addition, to provide further clarity, the entities exempted from the ambit of these
guidelines have been provided separately.

7.3 Alternative method for exposure to smaller entities: At present, banks have the
option to follow an alternative method for exposures to ‘smaller entities’ which have a)
UFCE; and b) are not in position to provide information on their UFCE to the bank.
However, without obtaining information on UFCE from such entities [refer (b) above)],
banks will not be in position to ascertain whether the entity has UFCE or not [refer (a)
above)]. To address this issue, the alternative method has been made applicable for
exposure to ‘smaller entities’ which have FCE, instead of UFCE, and are not in position
to provide information on their UFCE. Further, the definition of ‘smaller entities’ for this
purpose has been revised.

7.4 Incremental Capital Requirement: At present, the incremental capital

requirement for exposures falling in the last bucket is provided as 25 per cent increase
in risk weight. It is clarified that the incremental requirement is 25 percentage points
increase in risk weight. For example, if an entity which otherwise attracts a risk weight
of 50% falls in the last bucket, the applicable risk weight would be 75% (50%+25%).
This is because the exposures falling in same bucket will have equal increase in their
riskiness irrespective of the original risk weight applicable.

*****